International Economics - The Final Quiz - Part 2

1. If in a 2 products-2 country word, a country has an absolute disadvantage vis-a-vis the another country, opening to trade will decrease its average productivity.

True

False

An absolute disadvantage means that the productivity in both the sector is lower than the productivity in the same sector in the other country, that is, calling the productivity P:
Country x (Pi, Pj) - Country y (Pi, Pj)
Pi,x>Pi,y - Pj,x>Pj,y
That means, country Y will focus on the less productive sector and its average productivity will decline.

Explanation

An absolute disadvantage means that the productivity in both the sector is lower than the productivity in the same sector in the other country, that is, calling the productivity P:
Country x (Pi, Pj) - Country y (Pi, Pj)
Pi,x>Pi,y - Pj,x>Pj,y
That means, country Y will focus on the less productive sector and its average productivity will decline.

2. C and F are two goods, capital and labor intensive. It is possible to produce, with the same amount of K and L, both a specific quantity of C and a specific quantity of F? (That is, is possible to select a combination (K,L) that allow the production of both C and F, in different quantities?)

Yes

No

Boh

It is possible, because of the different technologies in the two industries (one of the assumption of HO), the isoquant of production have different shapes, and then can intercept in points that represent the combination of K and L that allow the production of both C and F.

Explanation

It is possible, because of the different technologies in the two industries (one of the assumption of HO), the isoquant of production have different shapes, and then can intercept in points that represent the combination of K and L that allow the production of both C and F.

3. If along an isoquant of production Q(K,L), the point X1 has K/L higher than the point X2, it is true to say that increase the capital used of one unit in X1 will imply a deltaL higher (in absolute terms) than in X2.

True

False

X1 use more K than L respect to the point X2. That means in X1 the productivity of the capital is lower, then increase the capital used by a further unit will diminish the labor needed less than in X2.

Explanation

X1 use more K than L respect to the point X2. That means in X1 the productivity of the capital is lower, then increase the capital used by a further unit will diminish the labor needed less than in X2.

4. A firm in Italy use two factors to operate: capital and labor. These data are give: Cost of an additional unit of labor: 12€ Cost of an additional unit of capital: 35€ MPL: 142 MPK: 368 What is your suggestion for the company?

The company should increase the Labor used, in order to reach the equilibrium

The company should increase the Capital used, in order to reach the equilibrium

The company is in the equilibrium

There are not enough data to answer

The equilibrium is MPL/MPK=w/r, that is 0.386=0.343, therefore, the company should increase the wage, decreasing the marginal productivity of the labor.

Explanation

The equilibrium is MPL/MPK=w/r, that is 0.386=0.343, therefore, the company should increase the wage, decreasing the marginal productivity of the labor.

5. Which of these factor does NOT depend on the indifference curve of the demand, in the Ricardian model?

The Gain from Trade of the country

The international price

The amount of Exportation and Importation of the country

The sector in which the country shall specialize

A + D

The sector in which the country shall specialize is determined through the productivity coefficients.

The Gain from Trade depends on the international price, the maximum possible gain from trade does not depend on the demand curve, but the maximum gain from trade will not be reached, in practice.

Explanation

The sector in which the country shall specialize is determined through the productivity coefficients.

The Gain from Trade depends on the international price, the maximum possible gain from trade does not depend on the demand curve, but the maximum gain from trade will not be reached, in practice.

6. Divide the following assumption in the right group: R --> Ricardian model assumtpion, HO --> Hesker-Olin model assumption. 1. Identical Technologeis through countries. 2. Perfect Competition. 3. Perfect mobility of factor across countries. 4. Constant return to scale.

R: 1,3; HO: 2,4

R: 2; HO: 1,4

R: 2,4; HO: 1,2,4

R: 1,2,4; HO: 2,3,4

7. Two coutnries, Comm (C), and Unity (U), work in a Ricardian model, and have recorded these data: ac au [worker-hour for prduce one unit] (A) Antennas 10 15 (C) Cars 23 20 (M) Microchips 0.5 1 (X) Xylophone 1 0.6 (Y) Yatch 240 120 and the level of wage is 26$/worker-hour for C, and 22$/worker-hour in U. In which sector C has a comparative advantage?

C and Y

A, C, and M

A and M

A and X

In none of them.

The comparative advantage of C are in the sector in which the relative price of the goods calculated as the price of the good for C over the price for U is lower than the ratio of the wages, that is 13/11.

These sectors are A and M.

Explanation

The comparative advantage of C are in the sector in which the relative price of the goods calculated as the price of the good for C over the price for U is lower than the ratio of the wages, that is 13/11.

These sectors are A and M.

8. Two countries, the Kingdom of Lesotho (L), and the Union of Comoros (C), work in a perfect "Ricardian model", producing two goods: Oil (O), and Bread (B). Knowing that: . the two countries are open to trade. . there is no mark-up between the TC and the price of the goods. . The production possibility frontier of Lesotho is (express in unit of bread and unit of oil): B = -0.5*O + 1000 . Lesotho has a workforce equal to 200 workers. . The production possibility frontier of Comoros is: B = -2*O + 750 . Comoros has a workforce equal to 300 workers. . The international price of oil is equal to 1$ per unit of bread. What is the level of wage in the two countries?

Lesotho: 5$/unit produced, Comoros: 2.5$/unit produced

Lesotho: 10$/unit produced, Comoros: 5$/unit produced

Lesotho: 10$/unit produced, Comoros cannot be determined

The two countries have the same level of wage equal to 5$/unit produced

There are not enough data to answer

The coefficient aij are:
L C
B 0.2 0.4
O 0.1 0.8

therefore Lesotho will specialize in the OIL production, and the Comoros in the BREAD production.
Be 1$ the price of the OIL, the wage in the Lesotho will be w=Pint/a=1/0.1=10$,
to determine the wage in Comoros, we need the international price of BREAD.

Explanation

The coefficient aij are:
L C
B 0.2 0.4
O 0.1 0.8

therefore Lesotho will specialize in the OIL production, and the Comoros in the BREAD production.
Be 1$ the price of the OIL, the wage in the Lesotho will be w=Pint/a=1/0.1=10$,
to determine the wage in Comoros, we need the international price of BREAD.

9. A country has a production possibility frontier, referring to the product C (capital intensive) and F (labor intensive), shown in the image. Given that the country have more unit of Labor than Capital, it is true to say that the country has a comparative advantage in F.

True

False

There are not enough data to answer

The comparative/absolute advantage are computed comparing prices of different countries. Therefore we cannot say nothing about the advantages of this question.

Explanation

The comparative/absolute advantage are computed comparing prices of different countries. Therefore we cannot say nothing about the advantages of this question.